Based on program materials from ABA Business Law Section, Nonprofit Law Basics Kathleen K. Law Nyemaster Goode, P.C. Des Moines, IA wlb@nyemaster.com Based on program materials from ABA Business Law Section, Spring Meeting, 2017

Formation Documents for Nonprofit Corporation Articles of Incorporation Bylaws

Distinguishing Between Nonprofit and Tax-Exempt State corporate law No owners/no distribution to owners “Tax-Exempt” Federal & state tax law Exempt from corporate income tax on certain income

Types of Exemptions 501(c)(3) – charity 501(c)(4) – social welfare 501(c)(6) – trade/professional association 501(c)(7) – social club

Classifications within 501(c)(3)s Private foundations Public charities Automatic Public support test Supporting organization

Requirements for Tax-Exempt Status as a 501(c)(3) Exempt purpose(s) Organized exclusively for exempt purposes Operated exclusively for exempt purposes No private inurement No candidate political activity No substantial legislative lobbying

No Private Benefit Organization must serve a public rather than a private interest Organization must not be operated for the benefit of private interests Organization may confer benefits to individuals so long as they are incidental, quantitatively and qualitatively, to the furthering of organization’s exempt purposes

No Private Inurement RULE: No part of the organization’s net earnings may inure to the benefit of any “insider” “Insiders” – founders, directors, and officers, and other persons in a position to influence decisions of the organization Penalty: Revocation of tax exempt status

Charitable Purposes BIG PICTURE – 501(c)(3)s must be Organized and Operated Exclusively for 1 or more of 8 “Charitable Purposes” Religious, Charitable, Scientific, Testing for Public Safety, Literary, Educational, Amateur Sports, Preventing Cruelty to Children or Animals Treasury Regulations expand on definition of “charitable” and “educational

Bylaws Subject Areas Members vs. Nonmembers If Members How are they selected How are they removed Regular/special meetings/unanimous written consent Communications via electronic mail Quorum Issues Voting Rights If no members – Using “memberships” as fundraising device

Bylaws Subject Areas (cont’d) Board of Directors – ONLY ONE BOARD Purpose of Board – Policy/Direct Selection “Ex Officio” Directors Number of Directors Tenure/Terms Limits? Qualifications Removal

Bylaws Subject Areas (cont’d) Officers Purpose of Officers – Implement/Report Board vs. Staff Subordinate Officers Chair President, CEO Secretary Treasurer

Bylaws Subject Areas (cont’d) Indemnification Mandatory Permissive Advancing Expenses D & O Insurance

Nonprofit Governance Traditionally Controlled by State Law IRS now actively involved Regulation by disclosure

Fiduciary Duties of Directors – Overview Directors of nonprofit corporations are held to two primary duties: Duty of Care Duty of Loyalty

Duty of Care The duty of care recognizes that as members of the Board and Committees of the Board directors have a decision-making function, planning function, and an oversight function

Duty of Care The decision-making function relates to the a specific decision or action of the Board as a whole The oversight function relates to the general activity of the Board overseeing the management and business operations of the organization The planning function relates to strategic planning

Duty of Loyalty The duty can arise in different situations: Conflict of Interest Transactions Denial of Opportunity for Organization

Duty of Loyalty A conflict of interest transaction is a transaction with the organization in which a director or family member has a direct or indirect financial (or other) interest in a transaction subject to the board’s approval Example: a director is asked to vote on a contract with a company in which the director has a significant ownership interest

Duty of Loyalty Many nonprofits have conflict of interest policies that require the director to self-identify any conflict and excuse himself or herself from the meeting in order to avoid the possibility of influencing the Board’s decision

Liability Protection for Directors Revised Iowa Nonprofit Corporation Act provides for liability protection for volunteer directors and officers. Iowa Code section 504.901 The Federal Volunteer Protection Act provides for civil liability protection for nonprofit volunteers. 42 U.S.C. sections 14501-14505.

Liability Protection for Directors A third type of protection for directors is directors and officers (“D&O”) liability coverage D&O coverage can cover judgments against trustees and officers as well as legal fees incurred by directors and officers in defending themselves in a lawsuit brought against them in their role as directors and officers of a nonprofit D&O coverage also covers the organization. May not cover lawyer on the board, or lawyer-officer, if deemed to be acting in a lawyer capacity Other insurance

Keys to Well-Functioning Boards Board Qualification and Education Be clear on Board roles – large board, small board, fiduciary obligations Specify Board member qualifications – minimum standards, specialized areas of expertise Board education General – mission, history Specific – industry, key areas, legal/industry developments